We are in business to make a profit. It is important we understand how to create a profit and loss account and understand the basic principle behind the account especially if you are just starting your own business. A profit and loss account is basically total sales less total business costs. The excess of sales over your business cost is called profit. On the same note, if your business cost is more than your sales, you are making a loss.
Here is an example of a profit and loss account that comply with FRS102.
Successful Business Limited for the year ended 31 December 2021
Profit and Loss account
Note
2021 (£)
2020 (£)
Sales
10,000,000
8,825,000
Cost of sales
(4,650,000)
(3,892,000)
Gross profit
5,350,000
4,933,000
Administrative expenses
(1,560,778)
(678,900)
Operating profit
1
3,789,222
4,254,100
Interest Income (receivable)
2,876
1,256
Interest expense (payable)
(19,320)
(10,367)
Profit before tax
3,772,778
4,244,989
Tax on profit
2
(755,259)
(849,806)
Net profit for the year
3,017,519
3,395,183
Dividend
0
(10,000)
Retained profit
3,017,519
3,385,183
Retained profit brought forward
3,385,183
0
Retained profit carried forward
6,402,702
3,385,183
Note 1: Operating profit is stated after charging the following:
2021 (£)
2021 (£)
Depreciation of fixed assets
3,330
3,850
Amortisation of intangible assets
189
189
operating lease rental for buildings
12,500
12,500
Auditor’s fee
12,000
12,000
Note 2: Corporation tax rate at 20% (2020: 20%)
2021 (£)
2021 (£)
Profit before tax
3,772,778
4,244,989
+ Depreciation of fixed assets
3,330
3,850
+ Amortisation of intangible assets
189
189
Taxable profit @20%
3,776,297
4,249,028
Tax on profit
755,259
849,806
Definitions
1. Retained profit is the amount kept by the company after paying dividends to shareholders.
2. Retained profit brought forward is the total accumulated retained profit from previous years of trading.
3.Retained profit carried forward is the current year retained profit plus the retained profit brought forward and this amount will be the retained profit brought forward for the net accounting year.
Overview Successful Business trading results
Successful Business Limited profit and loss account tells us, the company is making a net profit of £3,017,519 in 2021 and £3,395,183 in 2020. The company has sufficient fund to distribute its profit in the form of a dividend to its shareholders if they wish.
Compulsory filings with the UK authorities
You must deliver your company accounts, confirmation statement to Companies House when they are due. In addition, you must also deliver your company accounts which include your profit and loss account together with your corporation tax return to HM Revenue and Customs.
If you require help with your company accounts and confirmation statement preparation and filing, feel free to contact our accountants they would be more than happy to assist you.
There are ways to finance your purchase when you want to buy a company van for your business use but do not want to buy it outright. You can buy your company van through hire purchase or finance lease. Usually, these types of finance are offered by finance houses like the banks.
Financing options
Hire Purchase
Finance Lease
You would require to pay a deposit or down payment for your van. say 10% to the van dealer.
No deposit required.
The balance of the 90% cost will be financed through hire purchase.
The purchase cost is leased.
You would pay monthly instalments (plus interest on the HP amount) to the bank.
You pay monthly lease payments to the bank.
The bank owns the company van during the hire purchase period.
The bank owns the van but you have the right to use the van throughout the leasing period.
You own the van at the end of the HP period.
You have an option to buy the van at the end of the lease period.
Assess your business’s ability to pay for your company van’s monthly payments
Before the bank could offer you hire purchase or lease financing, they would assess your business’s ability to repay. For this purpose, they will usually look at your gearing ratio and interest cover ratio.
What is the gearing ratio?
Gearing is the proportion of your business’s debts in relation to your capital in your business. Generally, the bank would be delighted to see a gearing of no more than 50%. The bank would assess your company accounts in order to calculate your gearing ratio. Your balance sheet page would reveal these figures.
Gearing ratio = Long term + short term debts + bank overdraft divide by shareholder’s equity x 100%
Gearing ratio formula
Let look at the Successful Business Limited year 2021 Balance Sheet, the long term loan is £10,000 and short term loan included in the creditor’s figure, say is £50,000 and the shareholders’ equity is £6,403,702. The Gearing ratio is £60,000/£6,403,702 x 100% = 0.93%. The company would have no problem getting a Hire purchase or leasing finance.
What is the interest cover ratio?
Interest cover ratio is used to assess your business’s ability to pay your interest obligations on your debts. Generally, the higher the number the stronger your company to be. For this, the bank would be delighted to see an interest cover ratio of 2:1 and above.
Correspondingly, your bank would assess your profit and loss account to calculate your interest cover.
Interest cover = Profit before tax and interest divide by interest expense
Interest cover formula
Let take the Successful Business Limited profit and loss account’s figures as an example.
The profit before tax and interest is £3,789,222 and interest expense is £19,320. Therefore, the interest cover ratio is £3,789,222/£19,320 = 196:1.
Your company status with Companies House
The bank would also check your company’s status with Companies House. Generally, if you file your confirmation statement and company accounts promptly, your company will remain in good standing and have an “active” status.
However, if Companies House has changed your company status to “proposal to strike off”, this would be due to your confirmation statement or your company accounts are overdue. File the overdue documents as soon as possible.
If your company has been dissolved for the non-filings then you would have to restore your company before you can apply for Hire purchase or leasing finance.
A currency is a legal tender used to pay and buy goods and services. It replaces the barter system widely used in the olden days. Each country has its own national currency. Here is the list of world currency in circulation.
Each currency carries different value. For example, if you hold GBP £50,000 today (03 August 2020), your £50,000 is equivalent to USD 65,056.46. The same GBP £50,000 is worth the EURO €55,571.50.
Companies House in the UK only accepts payments in pound sterling (GBP).
If you are based in the countries that use the euro, for example, in Austria, you can pay Companies House by bank transfer using a bank in your home country. Your remittance will be converted into Pound Sterling (GBP) when arriving the UK bank account. Companies House Bank account details are as follows:
Sort code: 52 21 07 Account number: 41005309 Swift Code: NW BK GB 2L IBAN: GB34NWBK52210741005309
You must clearly state your company number on your bank transfer and use it as the reference. Thereafter, email your remittance advice to lfpfinance@companieshouse.gov.uk on the same day as your payment is sent – clearly stating the company name and number as the subject of your email. This will allow Companies House to process your payment quickly.
Paying Companies House by bank transfer may be more cost-effective with a larger sum like paying your late filing penalty for delivering your company accounts late.
For smaller filing fees, you can pay online using your debit or credit card. For example, you can pay your Confirmation statement filing fee at the same time filing your statement. If you are using debit or credit card issued by a bank outside the UK, you may be charged a foreign transaction fee.
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